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Weekly Market Recap – February 3, 2012

Now that figures for January have come in, it’s clear that Gold kicked off the new year with a fresh start and a confident outlook. This past month was the strongest January for Gold in more than 30 years. In addition, prices for the precious metal rose more than 11% in January, the largest gain since August 2011. In a note this week, Ross Norman, chief executive of Sharps Pixley, wrote, “With Gold starting 2012 at a cracking pace … Gold may be poised to set fresh highs this year but earlier than many — ourselves included — would have expected.” Gold still is viewed as directly tied to what is going on in Europe, and according to a note sent to investors this week by Commerzbank analysts, “Concerns about Greece and Portugal are keeping demand for Gold high and supporting the price. … The sovereign debt crisis will thus continue to preoccupy the markets for some considerable time yet and should support the Gold price.”

During a summit attended by leaders from 27 European Union (EU) states this week, a deal was reached on a permanent rescue fund for the eurozone, with 25 of the 27 European leaders present agreeing to back the German-inspired pact for budgetary discipline. The agreement on the European Stability Mechanism (ESM) – which will be worth about $500 billion euros and will go into effect a full year ahead of the previous timeframe of 2013 – is already being criticized internationally as too small to truly handle the debt exposure. Also coming out of the summit, the countries involved in the agreement have signed up for a tighter fiscal union in which the European Court of Justice had the power to fine countries that don’t stick to the budget deficits set by the EU.

There is fear that Portugal will be next in line to receive a bailout once Greece’s debt issues have been resolved. Edward Hugh, an economist in Barcelona, said, “It’s most likely that Portugal will say that it wants one of those, too.” According to Hugh, Portugal “…literally has nothing further to lose, except some of its debt burden.” Lisbon, Portugal’s largest city, is required to repay 9 billion euros of debt in September 2013.

There was positive news out of Germany this week, where unemployment levels reached a 20-year low in January. Germany’s economic expansion has helped soften the blow from the eurozone’s broader weakness. However, eurozone unemployment as a whole increased to 10.4%, the highest rate in the history of the EU.

Here in the U.S., the Case-Shiller report released this week showed that housing prices slid by 1.3% in November, with a 3.7% slide year-on-year. While the housing market seems to be improving, most homeowners are not seeing any part of that with the sliding prices, which have dropped to mid-2003 levels. Precious metals added to gains on the news. Also this week, private research group The Conference Board revealed that its Consumer Confidence Index fell from 64.8 to 61.1 in December, lower than the forecast of 68 that economists had anticipated. According to the Conference Board, although consumers were more positive about jobs, they were not as optimistic about their income prospects. The release of the latest unemployment figures on Friday showed that 243,000 new jobs were added in January, which was more than the 121,000 analysts had estimated.

This week, Christopher Wolfe of Fitch Ratings said that U.S. banks will face a continuing trend of erosion or core earnings this year if they do not offset revenue pressures by finding new ways to cut costs. President Barack Obama urged Congress this week to follow his plan to give homeowners a better chance at refinancing with historically low interest rates. The estimated cost of the President’s program is between $5 billion and $10 billion, which has Republicans already saying they will not support it. Federal Reserve President Ben Bernanke delivered a speech to Congress on Thursday of this week in which he warned about the risk to the U.S. of a sudden fiscal crisis and expressed his concerns about U.S. economic growth. Mr. Bernanke also defended Fed policy against harsh criticism that recent Fed decisions risked igniting inflation, saying that the decisions were necessary in an economy that is still struggling and that is vulnerable to shocks. Precious metals prices showed solid gains in response to Bernanke’s speech.

Pressure from the U.N mounted this week on Syria’s president. Arab leaders have urged the U.N. Security Council to help the Syrian people, claiming that Syria has failed to make reforms and that government forces continue to use deadly force against protesters. The uprising in Syria has endured for 10 months, and Western and Arab diplomats are calling for Assad to step down. Also in the Middle East, Iran’s supreme leader Ayatollah Ali Khamenei warned those who are enforcing an oil embargo against Iran, saying, “Sanctions will not have any impact on our determination to continue our nuclear course. In response to threats of oil embargo and war, we have our own threats to impose at the right time.” The comments are expected to continue driving up oil prices. Gold traditionally has a positive correlation with oil, and like oil, geopolitical tension is one of the major driving factors for the price of Gold.

According to banking and financial services group UBS, Gold demand in India is significantly above average this year. India has been the largest Gold consumer in the world in recent years. UBS added that new investors are coming into the Gold market for the first time in three months, thanks largely in part to the potential for quantitative easing. UBS analyst Edel Tully said that such easing could give Gold “explosive ingredients” in 2012. In China, Gold buying set records during the week-long Dragon Lunar New Year holiday. The Chinese Ministry of Commerce released numbers showing that sales of Gold, Silver, and jewelry rose by 57.6% at Caibai, one of Beijing’s largest gold dealers. “To most Chinese nowadays, gold is more convenient to cash in than other investment instruments,” said Guan Qiang of Caibai.